Why cable TV bills are only going up

Consumers will have to wait for a la carte TV and lower prices

Cable customers might prefer to only pay for the channels they watch, say HBO and the Weather Channel. Alas, subscribers are unlikely to be given such a la carte television menus or lower prices, experts say—even if there’s more consolidation in the industry.

Time Warner Cable Inc.’s
TWC, -0.43%
incoming CEO Rob Marcus said there are “clearly” programming costs and other benefits to cable industry consolidation, but whether or not the company participates in any merger is “is 100% driven by what’s in the best interest of our shareholders,” according to a report in The Wall Street Journal Tuesday. His comments came amid increasing takeover speculation, which has boosted the country’s second-largest cable operator’s stock price 35% since June 2013.

This consolidation talk probably means little to cable bills, and is also unlikely to hasten the move to allow customers to pay for just the channels they wish, analysts say. In fact, cable bills are likely going to only go up. “Cable-television prices roughly double every 10 years,” says technology analyst Jeff Kagan.

Cable companies might not be able to unbundle channels even if they wanted to. “Everyone can envision an a la carte model that consumers would like better,” says Craig Moffett, senior analyst at Moffett Nathanson Research. “If Comcast and Direct TV won’t sell it to you that way it’s because Viacom and Disney won’t sell it to them that way.” In fact, in a lawsuit filed last February in federal court in Manhattan, Cablevision Systems Corp.
CVC, +0.61%
alleged Viacom forced it to provide and pay for more than 14 “lesser-watched” channels such as Palladia, MTV Hits and VH1 Classic—in exchange for the right to provide more popular channels like Nickelodeon, MTV and Comedy Central. (Last month, Viacom filed a motion to dismiss with the U.S. District Court for the Southern District of New York.)

“The cable television industry is going through an enormous transformation,” Kagan says. There are three parts to this puzzle, he says: The customer, the cable television company and the networks. “And that is the problem,” he says. “Customer complaints about high prices don’t reach the networks.” Networks may have little reason to change course: Online video advertising is worth between $500 and $1 billion, while TV advertising exceeds $30 billion, according to Dan Rayburn, a principal analyst with business consulting firm Frost & Sullivan. (Rayburn has a $110 per month triple play contract—Internet, phone and TV, including HBO—with Verizon, including $15 in fees and taxes.)

Excluding expensive sports channels and ending bundling would allow consumers to cherry-pick their favorite channels, says Yung Trang, president of TechBargains.com, but consumers would have to sacrifice most of their current menu of channels for the privilege of watching a select few—at a slightly lower price. Why? The most popular channels would suddenly become very expensive, he says. “Instead of getting 120 channels for $60, you would likely only get 50 of your favorite channels for $50,” Trang says. Today, consumers can only buy premium fare like HBO and Showtime, he says. (HBO costs between $10 and $20 per month, depending on the cable provider and discounts.)

To be sure, there are also advantages to bundling. Cable companies also bundle Internet, television and—increasingly—services like home security. Trang himself switched from Dish satellite TV and Internet service Paxio—a Santa Clara, Calif.-based Internet provider—to Comcast cable because of the latter’s Xfinity Home, which offers cable TV, Internet and a home security system. He went from paying $160 per month to $180 per month, but Trang says $20 for home security system as part of a larger package was a bargain—50% less than what he’d have to pay if he bought it separately. “They don’t have to lay more cable, they just have to pay third party costs,” he says.

With unbundling, the cost of accessing the Internet would also rise, experts say. “Since 1998, the Internet has been priced on an all-you-can-eat model,” Moffett says. “If we switched to a model where video is delivered over the Internet on $7.99-per-month services like Netflix, it would still need to come via the cable operators’ fiber optic cables.” He estimates that around half of a $90 cable bill—the average national bill, according to The NPD Group—includes the cost of providing Internet. (Netflix added 1.3 million U.S. subscribers in the third quarter, giving it 31.1 million subscribers, while cable operators only had a net loss of 113,000 during the same period.)

But consumers do seem to be reaching the breaking point with cable bills. “The biggest threat to cable companies is cable companies,” Rayburn says. “As prices continue to rise, consumers will eventually say, ‘I’m not willing to pay what they’re charge anymore.’” The slow decline in cable subscribers over the last three years is largely due to the recession, weak property market and a broader belt-tightening. And not all cord-cutters are turning their back on cable television, he says: Some are moving into retirement homes, while others are getting married. “It doesn’t mean that the broadcast television is dead or dying,” he says. “Less than 1% of all of the market has cut the cord.”

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